In a single day of trading this week, consumer credit card company Synchrony Financial (SYF) plunged a whopping 13% after it said it expected to see more bad debt in the next year.
On Tuesday, the Stamford, Conn.-based company said in a regulatory filing that it expected its net rate for charge-offs (i.e., debt it expects never to collect) to increase 20 to 30 basis points over the next year — and that it needed to set aside money to prepare for that.
Synchrony is America’s largest issuer of so-called private-label credit cards for major retailers like Walmart and Gap, and its announcement Tuesday comes as other financial-services companies are predicting higher rates of defaults. Both Capital One and JPMorgan & Chase Co. have both noted that bad loans are on the rise, as Bloomberg reports this week.
However, some analysts still see this as an overreaction and remain bullish on the stock — noting that charge-off rates have been historically low and are just getting back to normal.
Barclays put out a research note saying this news will only be a “modest negative for earnings going forward.” The longer term potential for the company remains high, according to Barclays, which has a price target of $41 for Synchrony.
“[W]e still think the secular trends favor SYF and the company is set up to outgrow other card stocks in the group,” Barclays noted, “and with the stock trading at 8.5x our new lower 2017 estimate, it appears more than adequately discounted for the prospect of a moderate deterioration in credit.”
In another research note, BTIG’s analysts unveiled an even higher price target at $42 a share while citing commentary from Synchrony’s executives who believe the overall credit market is still “benign.”
BTIG also noted the net charge-off rate was still at historic lows, resting at 4.33%. This compares to 4.51% in 2014, 4.68% in 2013, and an astronomical 11.26% back in 2009. The analysts further argue an increase in this rate simply represents charge-off rates going back to normal; that should have been expected, they argue.
Moreover, BTIG believes Synchrony could get good news this month, as the Federal Reserve is expected to announce whether Synchrony will be allowed to pay out dividends and launch a share buyback program. If the Fed allows these two things, that could draw in more investors and potentially increase Synchrony’s share price.
Jefferies’ John Hecht also believes now is the time to buy, but lowered his price targets to $35. Still, he says the new charge-off rate’s impact on earnings might be partially covered by Synchrony’s loan portfolio growth, which was 4%-6% above guidance in Q1.
The upshot of most of these analysts’ notes is that Tuesday’s dip could provide an opportunity for investors.
By: Rayhanul Ibrahim (Yahoo).
Photo: The Sydney Morning Herald.
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